Larry Catá Backer's comments on current issues in transnational law and policy. These essays focus on the constitution of regulatory communities (political, economic, and religious) as they manage their constituencies and the conflicts between them. The context is globalization. This is an academic field-free zone: expect to travel "without documents" through the sometimes strongly guarded boundaries of international relations, constitutional, international, comparative, and corporate law.

Wednesday, April 29, 2009

One of the great curiosities of American federalism is that the term is nowhere mentioned in the Constitution itself. More curious still is that it appears nowhere protected from incursions by either the apparatus of state or general governments. But it is not that the founders were unaware of the need to include strong structural protections to guard the division of authority between newly subordinate state and a limited but powerful general government. It was quite clear that the Constitution, as designed in 1789 was built to provide strong limits to assertions of federal power. But 18th century political theorists, including bit not limited to the framers of the federal Constitution, unlike their 21st century progeny, were neither micro managers of elaborations of power frameworks; nor did they fear politics.

The Constitution was designed, like the European Union several centuries later, to structure the general government in a manner that made it impossible for that government to assert much authority without the complicity of states and the people. The election of the President was tied to state politics and layered deliberation through the electoral college. The power to tax was restricted. But most important of all, political power at the federal level could not be asserted without the approval of states. The Senate was not popularly elected, but was a creature of and served the interests of state governments. Essentially states controlled the amount of power that could be asserted at the center. And to that extent, at least, the framers also relied on political realities. Rather than constrain either state or federal government within a tightly drawn laundry list of powers, the framers left the actual boundaries between state and federal power to the political process. The openly restraints were the loosely worded positive grants of power allocated to the federal government. When states assembled in Congress (in the Senate) and the people assembled in Congress (in the House) determined that federal authority ought to be invoked, then, within the loose constraints of the Constitution itself, such authority could be asserted. Beyond that, the difficulties of raising substantial revenues served as an effective limit on assertions of federal authority. Politics could work to adjust the boundaries of federalism within this framework because the states' interests were directly represented in a critical institution of the federal governmental apparatus.

But the structural framework that effectively regulated federalism was slowly undermined over the course of the 19th century. The bitter divisions that led to the civil war interfered with timely election, and great scandals involving bribery, corruption at the state level added to a distrust of states as repositories of federal republican ideals. Moreover, by the end of the 19th century a national elite had arisen that increasingly found states in the way of the construction of national markets and a national society, and perhaps more importantly, the great not-yet-assimilated mass of immigrant voters in large cities threatened control of the election apparatus by making it harder for national elites and a national media to influence the direction of things. At the same time, the increasing need for federal intervention in national projects, and the conservative judicial approach to interpretation of federal tax powers placed great pressure on both local and national elites seeking to benefit from cross border projects operated at the federal level. The result, by the time of the American intervention in the first European War of the 20th century was a radical restructuring of the federal constitution by the imposition of direct election of senators and the adoption of a federal power to tax substantially all it desired. These changes, more than any others, substantially recast the structural framework of federalism. No longer a creature of state power, federalism became, by the beginning of the 10th century, purely a creature of federal largess--and adjusted by four institutions of federal power--President, Senate, House and Judiciary--with a primary loyalty to the national enterprise. That it took almost a century for the logic of these changes to become better known does not change the reality of the effects of these changes well before the rise of the current political divisions between what passes for "conservative" and "liberal" in 21st century America. All of this, of course, is well known.

Now, today's version of American traditionalists seek to reinvent a structural element to federalism within the federal constitution. Take a recent case in point: Randy E. Barnett, The Case for a Federalism Amendment: How the Tea Parties Can Make Washington Pay Attention, The Wall Street Journal, April 23, 2009. Professor Barnett focuses on popular discontent by at least one segment of the American electorate (though how large a segment is open to dispute) in the form of "tea parties." These shows of discontent are pretty but useless; stronger medicine is required:

While well-intentioned, such symbolic resolutions are not likely to have the slightest impact on the federal courts, which long ago adopted a virtually unlimited construction of Congressional power. But state legislatures have a realpower under the Constitution by which to resist the growth of federal power: They can petition Congress for a convention to propose amendments to the Constitution. Id.

But of course, such conventions, as Louis XVI learned in other circumstances, can be dangerous things, especially when the party in power might have other plans. And so more precision is required. "Here's how: State legislatures can petition Congress for a convention to propose a specific amendment. Congress can then avert a convention by proposing this amendment to the states, before the number of petitions reaches two-thirds. It was the looming threat of state petitions calling for a convention to provide for the direct election of U.S. senators that induced a reluctant Congress to propose the 17th Amendment, which did just that." Id.

So what kind of structural change can be used to revive federalism in the United States? Professor Barnett offers two solutions. One is partial and reactionary. The other is bureaucratic and substantive. For the first he would repeal the federal power to tax broadly--but not the construction of a directly elected House and Senate. "One simple proposal would be to repeal the 16th Amendment enacted in 1913 that authorized a federal income tax. This single change would strike at the heart of unlimited federal power and end the costly and intrusive tax code." Id. The other proposal is necessarily more elaborate. It would purport to limit federal power over commerce and the spending power. This in addition to the repeal of the power; to tax income. But the power to interpret these provisions remains in the federal courts. And states remain locked out of direct participation in federal legislative power. Instead, states and the federal government are invited to haggle constantly, in the courts, over the extent of this or that assertion of this or that substantive provision. The mindset is bureaucratic and technical. But to the extent that power is shifted--it moves from legislature to courts, precisely where Professor Barnett complains, that federal power has been boundlessly construed.

Though the idea invokes, as is both necessary and customary, the spirit of the framers for this purpose (e.g., "Section 3 adopts James Madison's reading of the taxing and borrowing powers of Article I to limit federal spending to that which is incident to an enumerated power." id.), this is hardly a traditionalist call. They are also unlikely to work. The proposed amendment has the byzantine feel of a bureaucratic solution to a political problem. As the Supreme Court determined with the last effort of a similar kind, such substantive based limitations--shorn of political flexibility--will prove unworkable. See, e.g., Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985). The problem is not the money, as Professor Barnett suggests, through that is what Americans tend to focus on. The problem is power.

As long as there does not exist an institution within the federal apparatus loyal to the interests of the states, and bound by that loyalty to apply those interests at the federal level, there will be no effective form of federalism. There will only be its shadow. Perhaps that is all that modern American traditionalists want--the appearance of federalism. Thus a generation's worth of "traditionalist" Supreme Court cases carving out some sort of "federalism" within the current version of the Constitution, that provides more bark than bite in fact. See, United States v. Morrison, 529 U.S. 598 (2000); City of Borne v. Flores, 521 U.S. 507 (1997); New York v. United States, 505 U.S. 144 (1992); Printz v. United States, 521 U.S. 898 (1997). Each of these attempts at interpretive structural protection for federalism (understood as protection of states against assertions of federal power) is both narrowly defined and dependent on federal institutions for their elaboration and protection. All focus on this or that substantive element that does little to provide a comprehensive principle of the nature of power left to the states. The current slate of proposals, like those of Professor Barnett, add to the window dressing. They are more form and structural micro management without politics, principle and flexibility. This is hardly the most significant approach to constitutionalism imprinted on the Republic by the founders. See, e.g., McColloch v. Maryland, 17 U.S. (Wheat.) 316 (1819). Yet if that is the case, then this is much ado about nothing but power--personal power grounded in the arbitrariness of the appearance of ideological difference without distinction in fact.

Tuesday, April 28, 2009

This is the fifth of a series of five (5) essays in which the nature and character of sovereign wealth funds are considered. Specifically the essays explore whether a sovereign wealth find can form itself to the ideals expressed in emerging regulatory regimes, like the Santiago Principles, one based on the idea that states may be treated like private entities with respect to their enterprises, formally sovereign but functionally private, as long as they conform to a set of behavior expectations which are said to distinguish sovereign from private behavior. The focus of that study is the "socially responsible" SWF, using as its model the Norwegian SWF, proffered by many as the model an an ideal form of sovereign wealth fund.

Part I provides an introduction to the issues to be considered and a framework for analysis. Part II explores the conceptual and regulatory framework currently arising for the transnational regulation of SWF grounded in the idea of a critical distinction between public actors and private action for constructing a system of SWF regulation. Part III focuses on the Norwegian Funds themselves: history, legal structure, and investment principles. It looks particularly at the role of the Ethics Council in SWF investment decisions. Part IV examines the Norwegian Funds in action. It explores the nature of the Norwegian SWF's engagement with corporate social responsibility through its investments, as well as its engagement with two political situations: the Israel-Palestine conflict, and the political situation in Myanmar. Lastly it examines the use of the Norwegian Fund for purposes of promoting development and its application to issues of Norwegian macroeconomic policy in the face of the economic crisis of 2008, especially with respect to investment in India. Part V looks to the regulatory implications of the relationship between the idealized framework within which regulation is constructed and the reality of the operation of the Norwegian SWF. In particular, the following are examined: (1) The role of investment and the utility of the idealized private investor model; (2) the importance of approaches in conceptualization of regulatory options; and (3) participation versus regulation as an alternative to the Public/private model.

Abstract:The character of global regulation has changed dramatically over the last decade. Today, multinational corporations sometimes assert substantial regulatory power across borders, and states sometimes enter markets as participants rather than as regulators— especially when they engage in economic activity outside their borders through sovereign wealth funds (SWFs). In both cases the current transnational ordering has settled on voluntary principles based approaches to regulation. SWFs are controlled by states but seek to participate in private markets in the same way as private investment vehicles. But the difficulty has been the need to overcome the inherent sovereign character of state investment, central to the definition of SWFs. SWFs thus proceed from definition to conundrum. If SWFs are grounded in the reality of their formal connection to states, and if states are deemed sovereign in their actions, then it might be reasonable to assume that such funds could not be treated like private investment funds. To bridge that gap, it was necessary to find a way to disconnect SWFs from the state and sovereign activity, and to model private activity in a way that made it possible to construct a set of behavior principles that might produce an equivalence between SWFs and private investment vehicles. The first was accomplished by creating a functional distinction between state and SWF, a distinction unnecessary for traditional sovereign investment. The second was grounded in the presumption that there is a way of distilling the essence of private investment behaviors sufficiently precisely to distinguish those behaviors from sovereign conduct. Both are nicely captured in the Santiago Principles. Both are problematic as either as concept or in application. This paper looks closely at one example of this rising phenomenon—the socially responsible sovereign wealth fund. It focuses on a close review of one of the most influential funds, the Norwegian Government Pension Fund—Global (Statenspensjonsfond - Utland). It is among the largest and most influential SWF in the world, and the largest in Europe. The Norwegian SWFprovides a particularly useful case study of the issues that are now at the center of reconceptualizations of the relationships between state and corporation, between economic and political regulation,between national and transnational legal frameworks, and between public and private legal regimes. The paper first describes conceptual and regulatory frameworks on which current policy discussions of sovereign wealth funds are undertaken. It then turns to the Norwegian funds, focusing on the history of the Norwegian fund, its legal structure and the development of its investment principles. It then looks to the way those principles were used in two distinct areas—the creation of incentives to produce changes in the behavior and culture of corporations and the response to the global financial crisis of 2008. The Norwegian SWFsuggests that the rising model of SWF governance, grounded on an assumption that a state organization formally public but functionally private, acting like an idealized private investor does not work either for private investors who seek to use investment for political ends or state investment entities that purport to refrain from that sort of activity.

A. Corporate Social ResponsibilityB. Development and Use in Macroeconomic Policy: the 2008 Financial Crisis

V. Regulatory Implications

A. The role of Investment and the Utility of the Idealized Private investor Model.B. The importance of approaches in conceptualization of regulatory options:C. Participation versus regulation as an alternative to the Public/private model.

VI. Conclusion.

_____

V. REGULATORY IMPLICATIONS

A. The role of Investment and the Utility of the Idealized Private Investor Model.

An important element of the debate about regulatory approaches to sovereign wealth funds relates to the character of the funds’ owners. The fear expressed by some is that funds serve as a covert mechanism for extending state power.278 More importantly, there is a suggestion that the integrity of private markets themselves are threatened when they cease functioning as economic fora and begin to serve as another vehicle for the advancement of state political and regulatory activity. What are the roles of investment? Does the Norway SWF act as a private/public investor under the idealized private investor model? How is the wealth maximization described for the Norway SWF? Is it different than private investments? If it is different, should it matter?

For the Norwegian Fund, the answer appears simple enough—the funds ought to be treated as purely private and participatory vehicles of state investment.279 That position is worth considering in more detail. It starts with the principle of free movement of capital and open capital markets, 280 and suggests that the participation of sovereign wealth funds might contribute to the functioning of those markets.281 “They may therefore act as a stabilizing factor in financial markets by dampening asset price volatility and lowering liquidity risk premia.”282 Norway concedes only a limited set of restrictions “concerning national security.”283 It suggests itself and its operations as the model for sovereign wealth funds in a restrictionless environment.284 It points to several operational factors that reinforce the idea that the funds are essentially private and participator, rather than regulatory:

Key factors in the management of the Fund include a high degree of transparency in all aspects of its purpose and operation, the Fund’s role as a financial investor with non-strategic holdings, an explicit aim to maximise financial returns, and clear lines of responsibility between political authorities and the operational management. The management aims for international best practice, and the exercise of ownership rights is based on internationally accepted principles such as the UN Global Compact and the OECD Guidelines of Corporate Governance and for Multinational Enterprises.285

And it suggests that transparency not only serves to assuage fears but also positively contributes to market stability.286 Having created a model of a private participatory institution, the Norwegians assert that there is no reason to treat these funds differently from other private funds.287 Indeed, Norway’s position appears to be that a SWF is sufficiently functionally private if it maintains a separation of ownership from control of the fund. As long as the political branches are not directly in control, the SWF is sufficiently insulated to be treated like a private fund.288 In a sense they are right—to the extent that private funds also seek to regulate behavior through investment activity. Yet that sort of targeted regulatory investment contradicts the essence of SWF’s as non-political and thus safe. SWFs are quite political in their objectives—but that does not make them different from other private funds.289 It makes them different from the ideal private investor behavior model that has been put forward to make them seem non-threatening. Yet they are threatening, but only in the same way that large private funds are threatening to national economies.

In this respect they mirror the conclusions of influential academics as well as the framework within which important voluntary codes have been drawn. Lurking beneath these notions is the idea that, to the extent that sovereign funds mimic private funds in objectives and operations, to the extent that a wall can be erected between the political/regulatory function of the state and its private/regulatory activities, then at least with respect to those private activities, the state owned funds ought to have the same rights (and be burdened with the same obligations) as private funds. For that purpose, of course, both the sovereign wealth funds and their supporters within academic and business circles have embraced a resumption usually unstated, that there are setsof presumptions and behaviors that can serve to define the ideal private investor (among which equal treatment is logical and fair), and that be distinguished from the behavior characteristics of other types of investors (states and other public entities. It presumes that a state can shed its sovereign character under certain circumstances and behave like other juridical persons (corporations and the like).

Those were the ideas underlying the basic framework of the Santiago Principles. The resulting “deal” presupposes the possibility of distinguishing public from private investment objectives, and political from financial motivations.290 European Union law has moved much further in defining the contours of this notion that most other jurisdictions. The context has been the efforts to harmonize traditional state authority to invest in national industry with the strengthened obligations under the European Community Treaty to foster free movement of capital and restrain states in subsidizing their own businesses for competitive advantage within the European market. European law has tended to regulate quite closely state activity that is deemed sovereign and permit only a very narrowly drawn area of activity where states can demonstrate actions that mimic those of a “private investor.” Thus, for example, the European Court of Justice “that the purchase by a Member State of equity interests in a company might be characterized as a ‘state aid’ under the competition provisions of the EC Treaty, and its compatibility with the common market must be assessed on the basis solely of the criteria laid down in that provision under the competition provisions of the EC Treaty.”291

The European Court of Justice has applied a private investor test in that context, explaining that “it is appropriate, in the present case, to apply the test of a private creditor in a market economy.”292 The framework is meant to be grounded in parity between state and private investors. The distinction is between action that can be characterized as private and that which is sovereign and regulatory, albeit indirectly. . . . “[W]hen injections of capital by a public investor disregard any prospect of profitability, even in the long term, such provision of capital must regarded as aid within the meaning of Article [87] of the Treaty.”293 Treaty restrictions on the regulatory activities of Member States, then, might not apply where the actions are what one might expect form a purely private actor in private markets. For that purpose, it requires a determination “whether, in similar circumstances, a private industrial group might also have made up the operating losses of the four subsidiaries between 1983 and 1987.”294

Yet the Norwegians, in their documents, also suggest that this picture is not entirely accurate.295 The Fund is operated as a private concern, but the Funds’ owner has been quite vocal about the use of its funds, and the construction of an investment strategy, as part of the political agenda of the Norwegian state as it seeks to leverage its voice in global affairs—from the conduct of the Burmese state apparatus, to the resolution of the Israel-Palestine wars, to the construction of global corporate governance cultures.296 Indeed, the Fund itself is understood as a vehicle for regulation without law, for governance beyond a state.297 The wealth maximization or sound investment principles, then, serve merely as the framework boundaries within which political activity can occur.298 As long as, within appropriate time horizons, the Funds invest soundly, a host of other factors may come into play to determine the specific manner of investment. The opportunity to use the Funds, then, to project power, especially regulatory power, directly into markets, is great. That projection of power was baldly asserted by the Funds’ Director General in testimony before the American Congress in 2008.299 But it is also finessed within the language of traditional financial management: “The ethical guidelines for the management of the Fund are premised on high returns over time being dependent on sustainable development, in the financial, ecological and social sense.”300 Thus reframed, there is no space for the political in the actions of the Global Fund. Indeed, all actions can be understood in their financial and economic sense, since all actions have economic effect.

But Sovereign investors are not the only investment entities with these goals and programs. Consider something as innocuous as the TIAA CREF Social Choice Equity Fund,301 created in 2006 within a few years of the imposition of the Ethics Guidelines framework for the Norwegian Funds.302 The TIAA CREF Social Choice Fund “seeks a favorable long-term rate of return that tracks the investment performance of the U.S. stock market while giving special consideration to certain social criteria.”303 The Fund invests in a pool of roughly 3,000 U.S. companies that pass a set of screens for corporate governance and social responsibility factors.304 The factors include many that mirror those of the Norwegian Fund’s Ethics Guidelines: “strong stewards of the environment; devoted to serving local communities and society in general; committed to high labor standards; dedicated to producing high-quality, safe products; and managed in an ethical manner.”305 And like the Norwegian Guidelines, the Social Choice Fund also excludes certain industrial sectors.306 Yet few of the companies excluded from investment under the Norwegian Ethics Guidelines are also excluded under the TIAA-CREF Social Choice Fund guidelines.307 Moreover, the TIAA CREF Social Choice fund acknowledges that some exclusions have a negative effect on performance.308 But there are differences as well. The TIAA CREF fund criteria are not applied using a transparent set of procedures. There are no mandatory rules for exclusion. And discretion is vested entirely in the managers.309 On the other hand, the owners of the Fund can withdraw their funds at virtually any time.

TAA CREF is not unique. It can be understood as a proxy for a large number of similar funds, distinguishable only by the focus of their political agendas.310 These funds remain a growing factor in international investing, even in the course of the financial crisis of 2008.311 Like SWFs, private socially responsible investing remains a small part of the overall market, though not insignificant.312 In other respects, socially responsible private funds resemble SWFs like that of Norway,313 including a focus on ethics, aggressively applied.314 This is particularly the case in the way in which these funds stress the combination of financial and political interests.315 The point is not that these funds exit, but that they operate in ways that would be considered political, and suspect under the Santiago Principles, were they operated like this by a sovereign. The problem is not that the Norwegian SWF advances political agendas through interventions in private markets (while seeking to maximize returns as they understand the meaning of that notion)—they do. The problem is that private investors engage in substantially similar conduct.

The similarities and differences between the Norwegian Fund and a private fund constructed along similar lines suggests the value of grounding regulatory analysis on the private character of the investment activity. If public and private funds act the same way, and privilege the same behaviors, then it makes sense to treat them the same. The real role for regulation in this context ought to be to ensure that private funds are acting like private actors, and to devise systems to police that behavior. That, in essence is the basis of voluntary efforts like the Santiago Principles.316 Yet it also suggests the difficulties of the simple arguments made with respect to the regulatory framework for sovereign wealth funds. It is to those difficulties that the article turns to next.

B. The importance of approaches in conceptualization of regulatory options:

For all the similarities, for all of the conceptual congruence, it is clear that the two funds are very different, and yet they appear to function to the same ends. It is also clear that though the objectives of the two funds may be quite similar, they are deployed differently. Moreover, fundamentally similar investment objectives clearly emerge—the private fund and the Norwegian fund both mean to make money for their owners and they both seek to further agendas grounded in substantive values that are deemed to be attainable through a program of strategic investment. It is true enough that the Norwegian investment program is substantially more elaborate, institutionalized and supported by a bureaucracy, but the functions are similar enough.

On the basis of these similarities, of course, the Norwegians and influential academics and government regulators have all argued for the treatment of both sorts of funds substantially the same. Because they behave alike, because they are both close to the notion of the ideal private actor, the public character of one of them ought not to make a difference. As long as the actors continue to behave like private actors, that ought to be enough of a basis on which to ground a regulatory regime. But the idealized private investor standard at the heart of the usual approach to sovereign wealth fund regulation masks more ambiguity than it resolves. There is still something that nags, or ought to, something that pulls at the corners of analysis. While public and private funds act alike, they are not the same.317

That “something” might be understood in one of two ways. First: The current formulation masks regulatory implications of distinctions between functionalist and formalist analysis. Formalist analysis has as its critical marker the manner of intervention. There is a distinction between formal lawmaking and the regulatory effects of participatory actions. Form may be dispositive. If the state owns a fund, the state is the fund and the fund is a sovereign apparatus.

In contrast, a functionalist analysis looks to effects, rejects the idea of a difference between law and regulatory effects. Form is not dispositive. But what ought to be the governing law when one state seeks to invest in the economy of another state? This question has become particularly acute since the rise, over the last decade of a number of large funds controlled by states, the purpose of which is to invest in economic entities wherever they may be domesticated. On the surface, this might suggest the best case for the equal treatment of states with private entities. In this case, unlike that in which the state always has the potential to legislate changes to its corporate law, the state stands in the same shoes as a private investor. On the other hand, the state, even as a private investor, has the power to reach deeply into the economic affairs of other states by implementing its legislative program through shareholder activism.

Both the ideal investor model, and the substantially equivalent effects rhetoric of regulatory reform that seeks to avoid a more vigorous regulatory intervention by host states is grounded on a privileging of functionalist analysis. Formal distinctions are of little moment. Functional equivalence is all that is necessary. For that purpose, a principles approach touching on disclosure, an approach also applied to private pools of capital, including hedge funds in the United States.318

But equally important, in this case formalist distinctions matter. And they matter for the equally important reason that formal differences do signal substantive differences that a functional analysis would hide. The critical difference is grounded in notions of coercion and in whether or not the ultimate investors have a choice in the manner in which they are represented and their funds invested. In both the public and private fund, individuals are the ultimate stakeholders and investors. It is for their benefit that these funds are created and it is their interests that they ultimately serve.

Let us consider from the perspective of differences between the Norwegian Fund and the TIAA CREF fund. The Norwegian Fund’s institutional holder is the state apparatus of Norway, but the ultimate beneficiaries are the citizens of Norway on whose behalf the government acts. The TIAA CREF funds are administered directly for the investors on whose behalf the fund managers operate. But TIAFF CREF investors are free to exit the Social Choice Fund at will (or at least in accordance with the procedures therefore agreed to when they first invested their funds).319 Norwegian citizens have no such right. They are bound by the choices made for them by the state apparatus. They are at least one critical step removed from the Fund.320 As a consequence, the TIAA CREF fund has to be more careful and conscious of the wishes of its ultimate investors than does the Norwegian Fund. The Norwegian state is accountable to the people, but the Fund is accountable only to the state.321 The difference is important because at this point we come back to where we started—the critical differences between a state as an autonomous institutional actor, and non-state actors.

Perhaps the Europeans are right—the state can never shed its character as state, as sovereign, and this character infects everything it does. If that is the case, then the arguments for asymmetric control of sovereign funds becomes stronger. On the other hand, consider the nature of the difference between the TRIAA CREF and Norwegian Fund relationship to their ultimate owners. That difference might be understood better as one similar to that between shareholders of an operating company and those of a conglomerate or holding company. If the fund is the operating company, then, the direct relationship between investor and fund marks a difference between the two types of funds, again leaving the state exposed as a critical, and unique actor. But this is not satisfactory either—private investment also contemplates a conglomerate model, sometimes with disastrous results.322

The position of states with respect to SWFs, already complicated, appears to be getting even more interesting from a legal perspective. Beyond the usual arguments--that SWF activity is political (and indirectly regulatory) rather than participatory and essentially private) because investment decisions are made to maximize the political agendas of investing states rather than to maximize profit as more conventionally defined. But that distinction is itself highly dubious. Investors sometimes invest for strategic reasons with incidental profit effects--corporate social responsibility movements attest to the popularity and legitimacy of such private investment strategies. Certainly in the United States socially responsible investing similar to that followed by the Norwegian SWF are quite respectable as legitimate private investment aims. States sometimes invest strictly to make a quick return on their investment in the most narrow traditional sense. Private investors sometimes choose to invest to use their shareholder power to effect changes in corporate culture in accordance with their values. States sometimes do the same. States sometimes work through interests in private investment funds.

Private investment funds sometimes work in parallel with SWFs. This was the conundrum acing the Indian government:

At one level, it is easy to identify some SWFs, such as Norway’s Government Pension Fund. However, as the aim is to separate a standard foreign institutional investor driven by profit objectives from a sovereign investor with strategic objectives, complications come up. Some investors from West Asia, for instance, invest in their own capacity. However, loose governance standards can mean an individual’s money snakes in and out of the country’s SWF, making demarcation tough, the official said.323

But the equation has changed a bit. No longer worried about either private self regulation models based on transparency, and adherence to some sort of idealized "reasonable private investor" model, nations are becoming more eager for the money held by SWF and will overlook more to attract investment.324 The Americans have led the way on this one as well.325 Need changes everything--even in law. The recent reluctance about SWF investment will give way to agreement to treat SWFs like other private investors, at least until the present crisis ends. And then we will see the expected great wave of calls for reform, regulation and distinct treatment for state investors. It is not clear, either now or later, that such distinction is necessary as a general rule.

This brings the conceptual discussion back to where it started: sovereign funds are different because states own them. The difference involves the nature of the power and function of states compared to private actors. But states assert diminishing sovereign power the farther beyond the its territory that state seeks to assert its political power. And it is possible for a state to limit its behavior to mimic that of private actors. Just as corporations now are vested with both the obligations and rights of sovereigns under certain circumstances, at least in certain soft law regimes,326 so states might be granted the obligations and rights of private actors when they seek to act in ways that mimic those of private actors outside their national territory. But they will never be private actors. And though they mimic an ideal private investor, they will invariably act in ways that necessarily are geared to the furtherance of state policy and the extension of state power beyond the state. The Norwegian Fund strongly evidences both tendencies—private conduct for regulatory purpose under a framework that is essentially private (wealth maximization). Ambiguity, in this case, brought by the conflation of public and private regulatory models, cannot breed regulatory certainty. But that uncertainty also breeds regulatory opportunity.

C. Participation versus regulation as an alternative to the Public/private model.

There is a parallel between the discussion of the regulatory framework of sovereign wealth funds and current interventionist activities of governments in response to the financial crisis at the end of the first decade of the 21st century. We are all well aware of the current financial crisis--a very slow train wreck almost a decade in the making, ignored (and indeed encouraged) by certain elements of the private sector with the collusion of states and now burst well beyond the capacity of any state to contain it. The brunt of reaction to the crisis has been traditional and conventional. States have sought to intervene directly in their markets and aid domestic enterprises. The American Emergency Economic Stabilization Act of 2008 is typical of these efforts.327 Other states have adopted similar measures, principally in Europe. In Asia, places like Hong Kong have moved to shore up confidence in its banks by guaranteeing all funds in Hong Kong Bank accounts. And the central banks of several Asian states have been intervening to the extent of their abilities.

In addition, there is talk of grand inter-governmental schemes to coordinate financial regulatory activity and even to replace the current intergovernmental transnational financial system and its star institution, the World Bank and the International Monetary Fund, at a grand convocation of powerful states to be held in November 2008.

"Pressed by European allies also to start work quickly on overhauling the financial system, Bush agreed to host the November 15 summit -- the first of a planned series. . . . The leaders will discuss progress in addressing the crisis, analyze its underlying causes, set principles for reforms and instruct working groups to begin developing recommendations for those solutions, White House spokeswoman Dana Perino said. . . . Invited will be leaders of the G20, which includes the Group of Seven major industrialized nations and key emerging economies like China, Brazil, Saudi Arabia and India. Leaders of the World Bank, International Monetary Fund, United Nations and the Financial Stability Forum have also been invited."328

Much is up for discussion, and there is a chance that little will get done, if only because the consensus possible after 1945 will elude the emerging groups of nations that make up the current international politico-financial order.329 And more important, perhaps, any workable solution will prove elusive because key private stakeholders will not be actively participating directly.

And that may be a problem. Most of the schemes floated by desperate states are both highly regulatory and interventionist. "Welcoming the summit details, Sarkozy said the meeting would be "followed by several others aimed at rebuilding the international financial system and making sure the current crisis does not happen again thanks to better regulation and more efficient surveillance of all players.""330 Even in connection with national efforts to contain the financial crisis, such attempts tend to revolve around a willingness to provide ailing sectors of the economy with direct or indirect infusions of capital in return for acceptance of both macro and micro regulation.331 Micro regulation is taking the form of the petty and vindictive, though asa post facto effort it serves merely as a gesture to assuage the public and preserve the images of politicians as somehow working in the public interest. Among the more publicized of these are the requirements that executive pay arrangements be reformed and specifically that golden parachute payments not be made.

Waiting in the wings are the social policy efforts to reform the terms of "bad" mortgages to keep people in their homes. Macro regulation is taking the form of changes in the regulation of banks and their financial arrangements.332 But there is an element of hybrid action as well. The governments will be taking interests in many of the entities they are "saving"--in the form of warrants from banks and other forms of equity stakes in other enterprises taking state largess.333 These arrangements will pose something of a conceptual difficulty for the future because the character of those investments--and the power of the state as "shareholder" rather than regulator remains nebulous at best. On the one hand, the state is, as a formal matter, investing in the market in the same way as any other private investor. To the extent it is participating in the market rather than regulating it, then the investment might be characterized as private rather than public. On the other and, this private investment is undertaken in entities over which the "investor" has strong regulatory authority. And indeed, the "investor" has utilized this regulatory power as a critical component of its private investment decision. On a substantive basis, then, the private investment appears to be incidental to the regulatory activity of the state.

But there have also been highly publicized private efforts to shore up confidence (and free up capital) for the debt markets. Among the more well known of these private efforts was tat of Warren Buffet to inject billions into the financial markets. The efforts by the larger and more stable investment houses to shore up its weaker members is another example. To date, though, these grand gestures have had little short term effect.334 But the effort might be viewed as a private effort not so much to shore up the private markets but to prod appropriate state intervention. "Billionaire Warren Buffett, calling turmoil in the markets an "economic Pearl Harbor,'' said his $5 billion investment in Goldman Sachs Group Inc. is an endorsement of the Treasury's $700 billion bank rescue plan. "I am betting on the Congress doing the right thing for the American public and passing this bill,'' Buffett said on cable channel CNBC today. "I certainly have a vote of confidence in Goldman and vote of confidence in Congress.''"335

But the critical difference between these efforts and those of Norway’s funds is important. Unlike activity, whether private or public, regulatory or participatory, sovereign activity is generally undertaken within the territory under its control. The more attenuated its control, the more attenuated the intervention. And within the sovereign territory of another state, intervention is at least conceptually problematical, though effected in one way or another. Where a state acts as a participant within the territory in which its sovereign power is greatest, it may be impossible to separate the public from the private (regulatory rather than participatory) functions of the state. That has been the position of the Europeans.336 The Americans, on the other hand, have embraced the idea that such distinctions can, indeed, be made.337

But Norway is not intervening in its own economy—it is projecting economic power abroad. And Norway is not seeking to extend it governmental power directly. It is protecting its wealth abroad like other private investors. But its objectives are its own. And the effects of its activities, whatever its form, may be distinctly felt. Moreover, the Norwegian state may be counting on that, so that the form of private investment is meant to mask the reality of political activity abroad.

And thus we come to the irony of regulatory approaches to sovereign wealth fund activities. The thrust of regulatory efforts neither reflect the realities of private fund behavior, nor the thrust of international regulatory consensus on the imposition of public obligations on private actors. In effect, the current approaches to SWF regulations appear to work at cross purposes with the current approaches to transnational regulation of private economic actors. The imposition of an idealized private investor model has the effect of forcing SWFs to act in a way that is substantially narrower than private investment entities. At the same time, the formally public/functionally private model suggests a division between public and private power that is belied by the reality of transnational regulatory behavior.

It is clear that the Norwegian Global SWF acts in a sovereign capacity. It deliberates seeks to project Norwegian policy preferences on a host of private actors otherwise beyond its reach. It seeks to use its investment strategies as a doorway to negotiate changes in foreign law, especially with respect to corporate social responsibility. But The Norway is acting as a sovereign through its Global Fund and in private markets, and is doing so aggressively, does not mean that SWFs ought to be viewed as a threat any greater than large private investment vehicles that also aggressively intervene in regulatory matters. The issue is the regulatory effect of interventions in private markets by public or private entities seeking to project power. A framework of regulation focused in this way may provide a greater congruence between SWF regulation frameworks and those emerging in related fields, especially the regulation of multinational corporations.338

VI. CONCLUSION.

Sovereign wealth funds have become powerful players in the global economy. They are instrumentalities of the state without direct regulatory power. They appear to function like private pools of investment funds. But the character of their owner— states—have tended to complicate regulatory approaches to their operations within the territory of other states. This article has explored the contours of some of those issues. It has suggested that while sovereign wealth funds do function like private funds, they may pursue wealth maximization strategies different from those of private investors. If one holds a broad view of regulation, including all direct and indirect actions with regulatory effect, then sovereign wealth funds can be seen as a powerful method of indirect regulation—regulation through participation in private markets. It provides a vehicle for extraterritorial application of municipal law impossible to effect directly. The antidote to this regulatory possibility is the creation of idealized private investors. The effect, of course, is to substantially circumscribe the power of States as states. Yet private individuals and large multinational corporations may act for the same indirect regulatory purposes of states—to increase their influence within states and among economic enterprises within those states, that may increase its power in those territories.

The Norwegian sovereign wealth funds evidence the complexities of any simpleminded regulatory approach to the regulation of sovereign wealth funds. At one level, the funds act no differently than other private participatory funds. And that provides a strong argument in favor of little special regulation—a position taken by many influential academics in the United States and Europe. On the other hand, the macro economic and ethics based actions of the funds suggest that Norway is consciously pursuing state policy indirectly through its funds. Investment is clearly meant to project Norway’s political power by other means, and to move policy in particular directions. That suggests a regulatory aspect to fund activity that belies that more benign characterization of fund activities at the heart of soft law efforts like the Santiago Principles. This was very much the case with respect to corporate social responsibility issues, where the examination focused on three actions—the implementation of responsible investor notions, the effectuation of a boycott of Israel through investment policy, and a reaction to the political situation in Myanmar through investment determinations.339 But it was also evident from an examination of the Global Fund’s responses to the financial crisis, where there was a shift of investment inward and the use of the fund (through adjustment of diversification rules) to aid hard hit developing states through investment decisions.340 Each of these represents a deviation from a model of indifferent private investment behavior norms, posited as fundamental to the treatment of sovereign investors like their private counterparts.

Ultimately the foundational issue touches on the increasing merger of public and private law. Multinational corporations now regulate and may be subject to public law obligations.341 States may participate in markets and are entitled to the privileges of the market.342 The easy separation of economic and political activity is now more difficult. Regulatory frameworks will have to reflect this complexity as well. The Norwegian funds provide a particularly useful case study of the issues that are now at the center of reconceptualizations of the relationships between state and corporation, between economic and political regulation, between national and transnational legal frameworks, and between public and private legal regimes. The Norwegian SWF suggests that the rising model of SWF governance, grounded on an assumption that a state organization formally public but functionally private, the conduct of which is gauged non-political and non-threatening when adhering to an idealized private investor does not reflect the reality of private investor behavior, who seek to use investment for political ends, and it does not realistically contain state investment entities that purport to refrain from that sort of activity. 343

280 “The declaration from the G8-summit on 7 June 2007 expressed what would seem to be a sound principle: “...we remain committed to minimize any national restrictions on foreign investment. Such restrictions should apply to very limited cases which primarily concern national security.”” Id.

281 “A debate on SWF should also reflect these funds’ potential to positively influence international financial markets through enhancing market liquidity and financial resource allocation. Typical characteristics of SWF are long investment horizons, no leverage and no claims for the imminent withdrawal of funds.” Id.

282 Id.

283 Id.

284 “In relation to the current debate on SWF, the management of the GovernmentPension Fund – Global is often cited as an example to be followed.” Id.

285 Id.

286 “Furthermore, openness about the fund management can contribute to stable international financial markets, as well as exert a disciplinary pressure on the management that improves its quality.” Id.

287 “However, we see no cause for regulations that would restrict the present investment activities of our Fund, or any regulation imposing restrictions on SWF over and above those applying to non-SWF investors.” Id.

289 See, id., at Part II, Box 2.5, at 60 (comparison of Global Fund with other investment funds). Though the focus there is on performance, there is a focus on investment strategy on this sort of comparative basis as well. See id., at 77, 100, 109 (focusing on the behavior of other large funds).

290 See discussion in Part II of this series, Conceptual and Regulatory Frameworks: Formally Public, Functionally Private.

292 The ECJ explained that in that case the public actor failed to “act as a public investor acting in a manner comparable to that of a private investor pursuing a structural policy – whether general or sectoral – and guided by the longer-term prospects of profitability of the capital invested. That public body had in fact to be compared to a private creditor seeking to obtain payment of sums owed to it by a debtor in financial difficulties.” Case T-198/01 Technische Glaswerke Ilmenau GmbH v. Commission [2004] ECR II-2717, at ¶¶ 98-99.

294 Case C-303/88 Italy v. Commission [1991] ECR I-1433 at ¶20 (determination to be made by the EU Commission).

295 See, e.g., Ministry of Finance-Norway, The Report from the Graver Committee (7-11-2003), (“The Petroleum Fund can also exert influence indirectly through the market. By explicitly communicating a decision not to buy a particular share, the Fund can send signals to company executives, other market participants and a company’s customers, particularly if the decision provides the market with information it did not have previously.” Id., at ¶3.2). The Graver Commission had this very much in mind in its conflation of fund and national proorities:

The fact that the Petroleum Fund is a Norwegian state-owned fund poses particular challenges. Norway has a high profile in international efforts to promote human rights, labour standards and the protection of the environment. This reputation can be both a strength and a weakness. On the one hand, the Petroleum Fund’s status as a Norwegian fund may make it easier to take a leading role in promoting a more responsible investment policy. At the same time, Norway’s reputation could easily be impaired if the Petroleum Fund appears to be delaying the work on developing ethical guidelines that support the Norwegian effort to promote the above values. The possibility of using, reinforcing or, in the event, damaging Norway’s standing may impose special obligations on the Fund.

Id.

296 See discussion, supra at text and notes --.

297 This position has also generated criticism, precisely because of the private character of what appears in effect to be public regulation.

The appearance of regulation may, in some circumstances, be worse than no regulation at all. The turn to ethics as a means of improving behaviour of multinational corporations offers an opportunity but also an opportunity cost: ethics can be a means of generating legal norms, through changing the reference points of the market and providing a language for the articulation of rights; yet they can also be a substitute for generating those norms. The Norwegian Council on Ethics demonstrates both tendencies.

Simon Chesterman, Laws, Standards or Voluntary Guidelines, Norges Finansdepartmentet, Editorial article, Ministry of Finance, 20.12.2007. Professor Chesterman proposes instead that the Council either act in secret or that Norway explicitly at in its sovereign capacity through the enactment of positive law. See, id. 298 The Norwegians put it differently, emphasizing the framework and deemphasizing the political effect.

Two policy instruments – the exercise of ownership rights and exclusion of companies – are prescribed as tools to promote the ethical commitments of the Fund. It is emphasized that ownership interests in the companies in which the Fund invests are exercised with a view to safeguard the long-term financial interests of the Fund. The guidelines are based on the view that there is a link between sustainable economic development and sustainable social and environmental development, so that the Fund in the long run as a very diversified investor with a long time horizon will benefit from companies respecting fundamental ethical norms.

Statement by Director General Martin Skancke, Asset Management Department, Norwegian Ministry of Finance Before The subcommittee on Domestic and International Monetary Policy, Trade and Technology and the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises The Committee on Financial Services U.S. House of Representatives Hearing on “Foreign Government Investment in the U.S. Economy and Financial Sector” March 5th 2008, at 4.

299 Id. (“Norges Bank notes progress on some corporate governance issues it has raised with US authorities, but simultaneously expresses concern about lack of progress in other areas. I trust that you will interpret this as a gentle encouragement of further strengthening the already high standing of US financial markets.” Id., at 7).

306 “A company’s involvement in the alcohol, tobacco, gambling, firearms, military and nuclear power industries is also reviewed and integrated into the process. Because of the negative social and environmental consequences of these products and services, companies with substantial involvement are unlikely to be included in the fund.” TAIAA-CREF Social Choice Equity Fund (Dec. 31, 2008). Of course the sectors chosen for exclusion are different than those under the Norwegian Ethics Code. See discussion supra at text and notes, --.

309 Marla Brill, The Ethical Edge, Financial Advisor (April 2009) (“Investing with socially respon-sible criteria has long been viewed as a way to align one’s principles and pocketbook. But as the economic clouds darken, it’s also important to consider that improved ethics might also improve the bottom line, benefiting shareholders in the long run. At least that’s the belief of Todd Ahlsten, manager of the Parnassus Equity Income Fund.” Id.).

310 “If specific political issues are important to you, it is possible to check out investment companies that cater to them. The Women’s Equity Fund (www.womens-equity.com) invests in stocks that advance women in the workplace, for example. Portfolio 21 (www.portfolio21.com) and Sierra Club funds (www.sierraclubfunds.com) focus on companies they consider environmentally progressive.” Alina Tugend, Picking Stocks that Don’t Sin, The New York Times, March 17, 2007.

311 “The Socially Responsive Fund is still seeing investor inflows despite the global economic downturn, Ms. Dyott says. Hard times can bring out the best in investors and companies, she said, noting that funds didn't yield to pressure after the terrorist attacks on Sept. 11, 2001, when some called for screens blocking investment in weapons companies to be dropped.” Brian Baskin, Hard Times Still See Social Responsibility, The Wall Street Journal, April 13, 2009 (reporting on the Neuberger Berman Socially Responsive Fund, ).

312 “Although socially responsible investments have grown substantially over the last 10 years, they still represent a small part of the world of investments under professional management: 9.4 percent, according to a report by the Social Investment Forum, a trade group for the industry” Alina Tugend, Picking Stocks that Don’t Sin, The New York Times, March 17, 2007. The Social Investment Fund ““identifies $2.71 trillion in total assets under management using one or more of the three core socially responsible investing strategies—screening, shareholder advocacy, and community investing.” Social Investment Fund, 2007 Report on Socially Responsible Investing Trends in the United States, at Sec. 1c.

314 See, e.g., Parnassus Investments, How We Invest, available . Note the similarity to the approach of the more elaborately structured Norwegian SWF:

At Parnassus, purchasing a company's stock is owning that business. We take our duty of ownership seriously and only invest in companies who act responsibly. Socially Responsible Investing. The screening process to select our universe of companies. Our Social Investment Principles talk about our stance on specific issues. Parnassus Community Development. Our investments into community development financing. Shareholder Advocacy. Working with management to factor in social values in business decisions to effect positive change. We also use our proxy votes on corporate resolutions to impact companies' policies. Read our Case Studies for examples of our shareholder advocacy impact.

Id.

315 Consider, as one example, the Amana Mutual Funds Trust, created to provide a vehicle for investment that complies with Islamic law. See Amana Mutual Funds Trust, Fund Features (“To ensure that investments meet the requirements of the Islamic faith, the Adviser (Saturna Capital) follows guidelines established by the Fiqh Council of North America (FCNA), a non-profit organization serving the Muslim community.” Id.).

317 Much has been made of a similar insight with respect to the market participatory activities of states within their own private sectors. For a thoughtful analysis on that basis in the context of state ownership of economic interests in private entities, see, Opinion of Advocate General Poiares Maduro in Federconsumatori v. Comune di Milano, Cases C-463/04 & 464/04.

324 But sometimes is has taken unusual form, especially as national desperation increases. See, e.g., Kavaljit Singh, Nicolas Sarkozy and Sovereign Wealth Funds, SPECTREZINE, Nov. 3, 2008 (“In a hard-hitting speech to the European Parliament in Strasbourg (France) on October 21, French President Nicolas Sarkozy proposed that European countries should create their own sovereign wealth funds to protect national companies from foreign "predators." Id.). The French leader argued, "I'm asking that we think about the possibility of creating, each one of us, sovereign funds and maybe these national sovereign funds could now and again coordinate to give an industrial response to the crisis," he told members of the European Parliament.” Id.

326 See Case Note: Rights And Accountability In Development (Raid) V Das Air (21 July 2008) Global Witness V Afrimex (28 August 2008): Small Steps Toward An Autonomous Transnational Legal System For The Regulation Of Multinational Corporations, MELBOURNE JOURNAL OF INTERNATIONAL LAW (forthcoming 2009).

329 The difficulty centers on the inversion of power represented by sovereign wealth funds. Developing states are the owners of the great majority of the wealth represented by sovereign wealth funds. Host countries are generally developed states. But developed states tend to control the agendas and framework for financial regulation. And they tend to be wary of the intentions of newly enriched states that had, for the greater part of the past several centuries, been exploited by them. That feuled the approach of the International Working Group of Sovereign Wealth Funds and the construction of the Santiago Principles, supra note 9 (e.g., “For that purpose, it will be important to continue ot demonstrate—to home and recipient countries, and the international financial markets—that the SWF arrangements are properly set up and investments are made on a an economic and financial basis.” Id., at 4). The threat, made from host countries, is protectionism and shutting SWFs off from important sectors of the global financial market, though one that governments of host states also sought to manage. David McCormick, Testimony Before the Joint Economic Committee, Feb. 13, 2008, HP-823 (“Yet, sovereign wealth funds also raise potential concerns. Primary among them is a risk that sovereign wealth funds could provoke a new wave of investment protectionism, which would be very harmful to the U.S. and global economies.”) (Mr. McCormick was then the Under Secretary for International Affairs).

331 That, of course, is the essence of both stimulus packages enacted at the end of the second Bush Administration and the beginning of the Obama administration, See Matthew Hadro, Government Can Influence Banks With $250 Billion Stock Buy, Say Economists, CNS News.com, October 30, 2008 (“The Emergency Economic Stabilization Act of 2008, passed by Congress and signed into law by President Bush on Oct. 15, includes a $250 billion government purchase in “senior-preferred shares” in U.S. banks. The purchase is designed to infuse capital into the banks so they can keep credit flowing and apparently help stabilize the market.” Id.). The relationship of AIG to the government is a widely publicized case in point. See, Matthew Karnitschnig, Deborah Solomon, Liam Pleven And Jon E. Hilsenrath, U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up, THE WALL STREET JOURNAL, Sept. 16, 2008 (“It puts the government in control of a private insurer -- a historic development, particularly considering that AIG isn't directly regulated by the federal government.” Id.).

343 See, Philip Whyte and Katinka Barysch, What should Europe do about sovereign wealth funds?, Centre for European Reform Bulletin (Oct./Nov. 2007) (“Even if SWFs tried to buy majority stakes, it is not clear that host countries should necessarily prevent them from doing so. After all, state- owned companies have been allowed to make cross-border takeovers within the EU: Electricité de France entered the UK's liberalised energy market by acquiring a handful of companies already competing in it. In most cases, a host country's response to a mooted takeover by an SWF should be confined to ensuring that it poses no threat to domestic competition.”).

Monday, April 27, 2009

This is the fourth of a series of five (5) essays in which the nature and character of sovereign wealth funds are considered. Specifically the essays explore whether a sovereign wealth find can form itself to the ideals expressed in emerging regulatory regimes, like the Santiago Principles, one based on the idea that states may be treated like private entities with respect to their enterprises, formally sovereign but functionally private, as long as they conform to a set of behavior expectations which are said to distinguish sovereign from private behavior. The focus of that study is the "socially responsible" SWF, using as its model the Norwegian SWF, proffered by many as the model an an ideal form of sovereign wealth fund.

Part I provides an introduction to the issues to be considered and a framework for analysis. Part II explores the conceptual and regulatory framework currently arising for the transnational regulation of SWF grounded in the idea of a critical distinction between public actors and private action for constructing a system of SWF regulation. Part III focuses on the Norwegian Funds themselves: history, legal structure, and investment principles. It looks particularly at the role of the Ethics Council in SWF investment decisions. Part IV examines the Norwegian Funds in action. It explores the nature of the Norwegian SWF's engagement with corporate social responsibility through its investments, as well as its engagement with two political situations: the Israel-Palestine conflict, and the political situation in Myanmar. Lastly it examines the use of the Norwegian Fund for purposes of promoting development and its application to issues of Norwegian macroeconomic policy in the face of the economic crisis of 2008, especially with respect to investment in India. Part V looks to the regulatory implications of the relationship between the idealized framework within which regulation is constructed and the reality of the operation of the Norwegian SWF. In particular, the following are examined: (1) The role of investment and the utility of the idealized private investor model; (2) the importance of approaches in conceptualization of regulatory options; and (3) participation versus regulation as an alternative to the Public/private model.

Abstract:The character of global regulation has changed dramatically over the last decade. Today, multinational corporations sometimes assert substantial regulatory power across borders, and states sometimes enter markets as participants rather than as regulators— especially when they engage in economic activity outside their borders through sovereign wealth funds (SWFs). In both cases the current transnational ordering has settled on voluntary principles based approaches to regulation. SWFs are controlled by states but seek to participate in private markets in the same way as private investment vehicles. But the difficulty has been the need to overcome the inherent sovereign character of state investment, central to the definition of SWFs. SWFs thus proceed from definition to conundrum. If SWFs are grounded in the reality of their formal connection to states, and if states are deemed sovereign in their actions, then it might be reasonable to assume that such funds could not be treated like private investment funds. To bridge that gap, it was necessary to find a way to disconnect SWFs from the state and sovereign activity, and to model private activity in a way that made it possible to construct a set of behavior principles that might produce an equivalence between SWFs and private investment vehicles. The first was accomplished by creating a functional distinction between state and SWF, a distinction unnecessary for traditional sovereign investment. The second was grounded in the presumption that there is a way of distilling the essence of private investment behaviors sufficiently precisely to distinguish those behaviors from sovereign conduct. Both are nicely captured in the Santiago Principles. Both are problematic as either as concept or in application. This paper looks closely at one example of this rising phenomenon—the socially responsible sovereign wealth fund. It focuses on a close review of one of the most influential funds, the Norwegian Government Pension Fund—Global (Statenspensjonsfond - Utland). It is among the largest and most influential SWF in the world, and the largest in Europe. The Norwegian SWFprovides a particularly useful case study of the issues that are now at the center of reconceptualizations of the relationships between state and corporation, between economic and political regulation,between national and transnational legal frameworks, and between public and private legal regimes. The paper first describes conceptual and regulatory frameworks on which current policy discussions of sovereign wealth funds are undertaken. It then turns to the Norwegian funds, focusing on the history of the Norwegian fund, its legal structure and the development of its investment principles. It then looks to the way those principles were used in two distinct areas—the creation of incentives to produce changes in the behavior and culture of corporations and the response to the global financial crisis of 2008. The Norwegian SWFsuggests that the rising model of SWF governance, grounded on an assumption that a state organization formally public but functionally private, acting like an idealized private investor does not work either for private investors who seek to use investment for political ends or state investment entities that purport to refrain from that sort of activity.

A. The role of Investment and the Utility of the Idealized Private investor Model.B. The importance of approaches in conceptualization of regulatory options:C. Participation versus regulation as an alternative to the Public/private model.

VI. Conclusion.

_____

IV. THE NORWAY FUNDS IN ACTION: PRIVATE AND PARTICIPATORYOR PUBLIC AND REGULATORY?

The formal organization of the Norwegian SWF produces a curious tension. It is constructed for the most part to achieve the aim of establishing a substantially autonomous investment unit, that operates free of political pressure. Yet its organization also introduces a political element into the heart of the formal organization of the management of the Global Fund, particularly in the form of the Ethics Council. This produces a certain ambiguity in Fund behavior—it operates like a private investment fund to the extent that it seeks to maximize shareholder value, but the maximization of shareholder value in this case requires the Fund be used to effect the global governance goals of the Norwegian state, an analysis to which the article turns to last.192 That ambiguity is nicely evidenced in the way in which investment policy is driven my notions of corporate social responsibility and in the way in which the Global Fund has responded to the financial crisis of 2008. Each is discussed in turn.

A. Corporate Social Responsibility and Ethics:

The formal organization of the Norwegian SWF, in both its internal and external aspects thus suggests an organization that mimics, to a substantial extent, the practices of private investment vehicles. The underlying objectives of the funds are economic or commercial—value maximization of fund assets over some certain time horizon. Yet the activities of the funds in practice suggest an interesting twist on the application of these private activity sounding norm frameworks in fact. I will briefly look at three applications of this investment policy: (1) corporate social responsibility; (2) sanctions against Israel; and (3) investment in Burma. The three suggest the way in which public and private interest may merge, and the way in which, as some critics fear, public policy can be deployed within markets.

i. Corporate Social Responsibility. Corporate social responsibility, in the form of exercising shareholder rights, is an important element of the investment strategy of the Norwegian Funds.193 The Fund management has focused on a few specific areas of corporate governance, which it has raised with entities whose equities they hold (as well as with the governments that have chartered those entities).194 For this purpose, the Bank has identified three broad areas of shareholder activism: corporate governance, children’s rights and environmental protection.195 Corporate governance is the gateway to issues of social and environmental activism.196 With respect to corporate governance, the Global Fund asserted shareholder power in two ways—by voting and through direct communications with companies.197 With respect to children’s rights, NBIM has produced a set of guidelines that describe its investor expectations “for corporate performance wit regard to preventing child labour and promoting children’s rights.”198 The object is not merely to serve as a guideline for Global Fund investment, but to influence the behavior of other investors (and thereby pressuring entities to conform to the expectations).199 The efforts, though, are framed in financial and economic terms.200 The Norges Bank environmental investor policy is particularly interesting for its conformity to an idealized private investor model. That policy is grounded on the idea that it, as an investor must “influence how companies work with or against government authorities when it comes to establishing binding climate legislation that can result in significant reductions in greenhouse gases.”201

In addition, Norges Bank has begun to work in concert with other funds, both public and private, to effect changes in the ways that governments approach environmental issues.202 The Bank also works on global legislative issues that affect corporate behavior, including accounting standards for companies in extractive industries, and the development of the United Nations Principles for Responsible Investing.203 This suggests two things. First, it suggests that the Global Fund does not adhere strictly to the ideal private investor model of the formally public/functionally private framework. Second, it appears that private funds do not limit their activities to financial and economic welfare maximization either.

Moreover, it is in the area of shareholder rights that sovereign wealth fund governance and the governance of multinational corporations meet. “The principles governing the exercise of the ownership rights of the Government Pension Fund are based on the UN Global Compact, the OECD Principles of Corporate Governance and the OECD Guidelines for Multinational Enterprises.”204 These soft law frameworks serve as the basis of the more pointed shareholder action program developed by the Fund. “Norges Bank and Folketrygdfondet have, on the basis of these principles, defined their own principles governing the exercise of the ownership rights of the Government Pension Fund – Global and the Government Pension Fund – Norway, respectively.”205 These include three principal areas of governance:

good corporate management, with a main emphasis on owners’ rights to nominate and appoint directors, to exercise their voting rights, to trade in their equities and to exercise influence over anti-takeover mechanisms, and to receive transparent and timely information; children’s rights and health, hereunder the battle against child labour, with a main emphasis on the value chains of multi-national companies; and corporate lobbying in relation to long-term environmental problems, hereunder climate changes.206

The wide-ranging and international focus of Fund investing reflects what the Norges Bank sees as an international consensus on public and private activity within markets. That consensus rejects the distinctions between public and private activity. It focuses, instead, on a functional approach in which both public and private actors are burdened with regulatory and policy obligations.207

The corporate governance agenda of the Global Fund suggests both the private and public side of Norway’s investment strategy. The Funds use traditional methods of assertions of shareholder power with respect to their substantive and ethical agendas. These include voting, dialog with companies, cooperation with other shareholders, and external communications (with public and civil society actors). With respect to issues of shareholder activism, the Fund does not necessarily pursue the same forms of action as might be available to private shareholder. Instead, the Fund focuses on state-to-state dialog, in an attempt to obtain legal reform for targeted corporate governance issues.208 A more traditional approach, however, was applied with respect to issues of executive compensation.209 In all cases, the Fund has become far more active with respect to its holdings. The object is to ensure that all companies in which the Fund invests adheres to the Fund’s ideas of appropriate corporate governance, irrespective of the national law of the home state.210 Where such national law is incompatible with that more to the taste of the Fund, then the Fund works either to change that legal basis,211 or to work around it to the extent that the statutes permit deviation.212

ii. Israel Boycott. Various combatants in the Israel Palestine conflict and their friends and allies in Europe in general and Norway in particular have made effective use of the Ethics Guidelines to put financial and media pressure on Israeli companies. The result has been to open another front in that complex war within global financial markets in general and Norway’s Funds in particular. The most recent genesis of this strategy has been repeated efforts to seek to exclude Israeli companies and companies that do business in Israel from the investment portfolios of the Norway Funds. “The Norwegian government has responded to Israel's military offensive in the Gaza strip by asking the Council of Ethics, which advises the country's €267bn Government Pension Fund, to check that companies in which it invests in the region are not involved in human or labour rights abuses.”213

While the determination to check those companies has not produced a blanket recommendation to exclude investment in any class of companies, the Ethics Counsel had begun to report conclusions with respect to individual companies before the announcement of post Gaza incursion of 2008-2009 by Israeli forces. The Ethics Committee consideration of a complaint against the Israel Electric Corporation (“IEC”) by the Norwegian NGO, People’s Aid, and a “local group”, Palestinavenner (“Friends of Palestine”).214 These philo-Palestinian cause entities in Norway alleged that “IEC has reduced the supply of electricity to Gaza and that this amounts to a form of collective punishment of the civilian population in Gaza.”215 IEC, substantially wholly owned by the State of Israel, supplied about 60% of electricity to the Gaza territory.216 During the autumn of 2007, IEC under instructions from the Israeli Defense Ministry, reduced electricity supplies to Gaza as part of an economic blockage in response to indiscriminate rocket attacks from the military and civilian population of Gaza.217 The Ethics Commission considered two actions of public organizations. The first was a report of the United Nations Office for Coordination of Humanitarian Affairs.218 The assumptions in the report were taken seriously by the Committee.219 The second was a discussion of a decision by the Israeli Supreme Court with respect to the legality of the electricity reductions by IEC.220 “This, however, has no direct bearing on the Council’s assessment.”221 In addition, the Ethics Committee heard from the Israeli Ambassador to Norway222 and from Palestinian official sources.223

On the basis of this information, the Ethics Council first acknowledged that its forum was being used as a site for the continuation of the conflict between the Israelis and Palestinians, but that it “is the role of the Council on Ethics to consider the behaviour of companies, not possible violations of international law conducted by states or other parties.”224 It determined that the electricity supply interruption was temporary, and that it was not possible to tie the humanitarian situation in Gaza to the actions of the IEC.225 In the absence of current violation, the only issue remaining was whether there was a future unacceptable risk of future breaches.226 Because there did not appear to be a current indication of future reduction, the Council decided against a recommendation of exclusion—at least for the moment.227 The opportunity to revisit the issue arose again in the aftermath of the Israeli incursion into the Gaza Strip in the waning days of the second Bush Administration.228

It is difficult to avoid the political in this consideration. It is also harder to conceive of a state entity in this case acting beyond the wishes of the Norwegian state with respect to its involvement in the economic aspects of this war. At the same time, issues of complicity have now become much more important for investors under instruments like the OECD’s Guidelines for Multinational Corporations.229 International consensus on corporate and financial complicity in violations of international law has forced private entities to be more aware of the political consequences of private economic activity. Those obligations, and consequences, fall equally on states seeking to intervene in private markets under similar conditions. But the result is perverse—the SWF that seeks to function like a private entity is now forced to factor political consequences to its private activities. In that case, SWF would most likely look to their owner’s own political interests rather than the generalized interests in the avoidance of violations of international law.230

iii. Investment Sanctions Against Burma. In its 2007 Annual Report,231 the Ethics Council summarized its actions with respect to companies operating in Myanmar (formerly Burma).

An issue of interest in the Autumn of 2007 was the dramatic situation in Burma. In this regard, the Ministry of Finance requested the Council on Ethics to give an account of cases pertaining to investments in companies with operations in Burma. Our letter of reply, which is included in this Annual Report, shows that over a longer period of time we have monitored several companies with operations in Burma. . . . The Council’s mandate indicates that the presence in, and the generation of revenue for oppressive states cannot, in itself, be sufficient for exclusion from the Fund. There must be a more direct link between the company’s operations and the human rights violations in question. Based on our knowledge of Burma from previous and on-going studies, we assume that larger infrastructure projects in Burma imply a great risk of gross and systematic human rights violations related to such work.232

The Ethics Council first noted that the Funds had no direct investment in Burma, but that a number of companies in which the Fund invested did have operations in Burma.233 It noted that in its prior review of economic activity in Burma, in 2005, “the Council regarded, as general point of departure, that the risk of grave human rights violations in connection with construction of infrastructure in Burma is considerable. The situation has hardly improved since then. Grave human rights violations such as forced displacement of people and extensive use of forced labour can be expected.”234 The problem is not direct commission of human rights violations, but complicity in their commission of human rights violations by the Burmese government.235

The Council engaged in extensive investigations,236 some of which also relied heavily on the Norwegian diplomatic corps in Southeast Asia.237 It determined that efforts to construct a gas pipeline form Burma to China was suspect

If companies in the Fund’s portfolio were to enter into contract agreements regarding the construction of such pipelines, the Council may recommend the exclusion of these companies already from the time of entering into the agreements. Because such undertakings would most likely involve an unacceptable risk of contributing to human rights violations, it is not considered necessary to wait until the violations actually take place.”238

On the other hand, The Ethics Commission declined to recommend exclusion of the South Korean company Daewoo for the export of military hardware and technology to Burma.239 But the reasons were technical: the violations had occurred in the past, they were unlikely to recur because the officials involved had been indicted in South Korea for breach of national law.240 The Council, though did note that though the sale of technology for the production of artillery shells does not fall within the weapons prohibitions of the Guidelines, their sale to a regime determined to be repressive might still constitute a particularly serious violation of fundamental ethical norms under the Guidelines.241 Lastly, the Council warned that investigations were ongoing with respect to two other Burma related matters. The first focused on entities participating in the construction of hydroelectric power plants in Burma.242 The second involved entities involved in mining operations in Burma.243 “The Council’s work on information gathering on these topics continues.”244 Here again, the political factors that motivated the approach to the Israeli issues underlie the relationship between the Norwegian state, the Global Fund and the objects of its investment.

B. Development and Use in Macroeconomic Policy: the 2008 Financial Crisis.

The criteria for investment in companies, and perhaps ultimately for grounding activity as shareholder, suggests the way in which funds, as investors, might help shape microeconomic policy.245 But SWF may also shape macro economic policy in a way that is harder to square with the private and participatory character of these funds. To suggest the parameters of this activity within the Norwegian Funds, it is only necessary to examine the conduct of these funds during the early course of the global financial downturn that became generally recognized during the summer of 2008. The fairly fast pattern of activity by the funds is nicely indicated by the changing complexion of Norwegian fund activities from mid 2008 on.246 The changes took two forms. The first was a retreat from investments abroad to a more traditional and sovereign use of Global Fund assets to support domestic economic programs. The second was a greater focus on strategic Global Fund investment to meet the political requirements of Norway, especially with respect to investment in emerging economies. Together they suggest the limits of the formally public/functionally private model grounded on a passive private investor behavior model, especially during turbulent financial periods. Each is explored below.

i. From Outbound to Inbound Investment. In the Spring of 2008, confidence in the performance of markets worldwide leads to a suggestion that the Global Fund would change its investment strategy to increase the allocation for equity investments from 40% to 60%. 247 The article further indicates that “To facilitate such investment, Slyngstad asked the government to let the central bank-run fund take stakes of up to 15 percent in individual companies, up from a 5 percent limit. The government decided on a 10 percent limit.”248 The Ministry of Finance decided to increase the allocation to equities in the Global Fund from 40 % to 60%, with an actual increase, at the end of the third quarter, of the allocation to equities to 53 per cent”249 The expansion continued to property and property development through the summer of 2008.250 This had been a subject of discussion in the prior year and reporting to the Storting in 2007.251

At the same time, the Global Fund continued to invest heavily in the financial sector. 252 By August 2008, this had become a source of concern.253 The bottom fell out in the late summer, with the collapse of Lehman Bros, in which the Global Fund had invested heavily.254 The Global Fund, also suffered losses with the collapse of Fannie Mae and Freddie Mac, though it had better anticipated this collapse.255 These losses prompted a response from Norges Bank.256

The effects of the financial collapse were not just felt in the value of the Global Fund. It also had an effect on the ability of the Global Fund managers to pursue its conventional investment strategies.257 According to the Summary of the 2008 Q3 Report by NBIM258: the return for the quarter of -7.7 per cent – the lowest in the fund’s history. The Report noted: “The turmoil in global equity and fixed income markets has resulted in major variations in the market value of the fund. The fund’s expected absolute volatility is a statistical measure that gives a model-based estimate of “normal” variations in its market value over the coming year. Since summer 2007, market movements have been far from normal, making the model less accurate than before. Market fluctuations as measured by absolute volatility have increased since summer 2007”.259

These losses had effects on Global Fund management. By December 16, 2008, it is reported that Norway is the latest country to plan a fiscal stimulus to be rolled out in early 2009 to ramp up domestic spending. According to Ziemba, “Norway’s stance was already expansionary. Its fiscal rule allows it to spend up to 4% of the GPF’s assets (the assumed return on investment in most years) to meet its non-oil deficit.”260 At year end, Norges Bank issued a press release indicating that Norges Bank will not purchase foreign exchange for the Global Fund in January 2009. According to the press release, “the Fund’s foreign exchange requirements are partly met by the state’s direct financial interest in petroleum activities (SDFI) and partly by Norges Bank’s purchases in the market. The Ministry of Finance determined the size of the monthly allocations to the Fund.261 In addition, the Global Fund moved more aggressively to protect its assets. In December 2008, for example, “NBIM filed a law suit in Maryland in an attempt to prevent Constellation Energy Group, in which NBIM owns 4.8%, from convening a special shareholder meeting on December 23 to vote on a takeover by MidAmerican Energy Company (a unit of Berkshire Hathaway).”262 As a consequence, the Global Fund, like other SWFs began to perform more like a traditional reserve fund—sovereign and conventional—than a functionally private and separate investment vehicle. The Norwegian Fund was sovereign after all.263

But most importantly, the losses and effects of the crisis resulted in a diversion of the Global Fund assets for domestic purposes. The initial focus was on the use of the state Pension fund, rather than the Global Fund for that purpose.264 By the end of January funds otherwise allocable to the Global Fund were being diverted to fund a domestic stimulus package.265 The Global Fund appeared to be going from external investor to another source of revenue for internal sovereign purposes.

ii. From Private Investor to Strategic Investment. Thus, by the end of January 2009, the focus of the Norwegian SWF appeared to change. It had moved form the formally public/functionally private model grounded in a non interventionist private actor investment framework to another source of state funds for domestic needs. An article published by Bloomberg on January 22, 2009, suggested that “financial institutions will be unable to tap more capital from sovereign wealth funds in China, the Middle East, Norway and Russia as those funds focus on shoring up domestic markets.”266 But it had changed in ,more telling ways as well. Even as it began deploying its funds to shore up its internal economy, the Fund continued to try to use its funds for global macro economic purposes. That was in line with an assessment of the investment strategy of the Global Fund with respect to emerging economies.267 Indeed, the idea in these cases was that intervention and engagement was more suitable for these markets.268

Perhaps the most telling intervention occurred in late 2008 in India. "In a move that will bring considerable relief to Indian equity markets roiled by the global credit crisis, the Norwegian Sovereign wealth fund (SWF), plans to invest around $2 billion (about Rs9,772 crore) in India, primarily in equities, over the next two months."269 It is managing to do this not by fiat but by the manipulation of its objective investment standards, "because it has increased India's weightage in its investment portfolio."270

The Norwegian government indicated that investments would take place between October 2008 and January 2009, pending a double taxation avoidance treaty which could be ready as early as January 2009. Thorvald Moe, deputy secretary general in Norway’s ministry of finance, indicated that the Government Pension Fund’s managers recently increased India’s weight from .2 per cent to .94 per cent because they see “potential in India, though its financial markets still have a long way to go”. The investment is to take place in companies that meet the ethical standards established by the Norwegian Parliament. The article further indicates that Mr. Moe was enthusiastic about the major expansion of the sovereign fund in India, adding that this was “more than just a strategic investment”. Finally, according to the article, Mr. Moe also said Norway plans to invest more in projects that took forward the Clean Development Mechanism, as part of the Norwegian initiative on sustainable development, with special emphasis on solar energy. 271

There are at least two principle ways of characterizing this move. On the one hand, the Norwegian SWF might be in the same position as a private investor who seeks to maximize wealth through a macro economic based long term investment strategy, as Warren Buffet recently attempted to much press coverage.272 It is, in this case, acting as a private investor in markets outside of its territory--that is outside of its power to regulate. It is because the investment is undertaken both (1) in the ordinary course of such investment (that is undertaken in the same manner of that available to private investors) and (2) is not subject to regulatory leverage (the case if the investment were undertaken domestically) that one could characterize this as akin to private investment activity. And there have been great efforts to arrive at a consensus to this effect.273 But that is not the way the Indian media see it. “An SWF is a global investment fund owned by a government. Unlike a private international investment fund, which is governed by profit motives, SWF's might have national strategic objectives that have made them controversial investment vehicles.”274

And one can see why: Norwegian 'investment' will "come into the country at a time when foreign institutional investors (FIIs), the main driver of Indian stock markets, have taken out close to $11.2 billion from the country since January." Id. If the Norwegian SWF is acting counter-intuitively, then its motives must be something other than profit. Or better put, the Norwegian SWF may be wiling to accept financial losses for a greater political value vis-à-vis India. But that is not investing, that is state political activity. And in this case, this suggests that a significant (though in this case positive and welcome) intervention by one state in the internal affairs of another through the form of private participatory activity can be subsumed within the private investor model for SWFs. Or, more likely, it suggests that the private investor model, like a mask, can be put on and taken off at the whim of the sovereign seeking, on the one hand, the equal treatment of its funds with private investment vehicles, and on the other hand, greater capacity to use private markets for strategic national purposes.

It is for that reason that governments, including that of India, have viewed SWF investment as a political threat--discounting the private character of the investment as well as the power of the state to effectively regulate that private investment by foreign public organizations. That had been the position in India as late as 2007, in a speech by Reserve Bank of India Governor Y.V. Reddy.275 But that reaction has been sidelined by the hard realities of the need for cash. The poor cannot afford the scruples of the well off, even in matters of law. In India's case, "the government decided to follow the finance ministry's suggestion tat India could at this time ill afford to be picky about the kind of overseas investors who bring in money."276

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END NOTES

192. See Part V (Regulatory Implications).

193 The Fund reported its conception of that responsibility quite directly:

investors should also share responsibility for how the companies in which they invest are conducting themselves, for what they are producing and for how they are treating the environment. The Government deems it important to integrate this type of responsibility into the management of the Government Pension Fund, because it promotes values that are important to the Norwegian people, and because it represents an important contribution to raising awareness amongst investors and companies domestically and abroad.

197 Id. (“At the end of 2008, Norges Bank had established or continued dialog with 16 companies concerning issues linked to corporate governance and shareholder rights. . . . In 2008, Norges Bank took part in 7, 871 general assemblies and voted on almost 70,000 issues. . . . [and] voted against 11 percent of the proposals.”).

198 Norges Bank Investment Management, NBIM Investor Expectations on Children’s Rights, available at 4. The expectations are summarized id., at 12, and include the development of a conforming corporate child labor policy, continuous risk assessment, preventive and corrective plans and actions, supply chain management systems, monitoring systems, performance testing, integration of potential economic impacts of social issues into corporate strategic planning and a transparent and well-functioning corporate governance system. Id.

199 “The NBIM Investor Expectations on Children’s Rights will serve as a reference for investors who adhere to the principles of responsible investment, and can be used as an indicator of best business practices by corporations globally. The primary function of the Expectations is not to blacklist or rank companies, but to serve as a point of departure for constructive dialogue between investors and companies, and to set a clear standard that companies globally must be expected to live up to.” Id., a 4.

207 Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On theManagement of the Government Pension Fund (Preliminary and Unofficial Translation, at 21 (“To maintain the Fund’s solid position as a responsible investor, the Ministry proposes that good corporate governance and environmental and social factors shall be integrated to a greater degree as relevant factors in the overall work on management of the Fund. This is in line with international developments and will entail a raised ambition level in this area.”).

208 “Norges Bank has, together with other large European investors, pursued a dialogue, through meetings and letter, with the Chairman and members of the U.S. Securities and Exchange Commission (“SEC”), concerning the importance of establishing regulations that ensure the shareholders real influence over the appointment of directors of US companies. The Bank deems progress thus far to be inadequate, and will continue to follow up on this issue in 2008.” Id.

209 The Report to Parliament explained:

Norges Bank voted against the proposals recommended by management in 25 pct. of the cases relating to remuneration. The Bank did not support the approval of remuneration plans that were not linked to actual performance, that permitted the repricing of options, that resulted in a relatively high degree of dilution of the ownership stakes of existing owners, and that were allotted at a price much lower than the market price, or that involved exaggerated pension schemes, as well as pension bonuses for Directors and auditors. Norges Bank also voted against a number of remuneration plans as the result of inadequate information.

The most important corporate management issue in the US last year concerned the ability of shareholders to nominate their own candidates for directorships, Norges Bank has, together with other large European investors, pursued a dialogue, through meetings and letter, with the Chairman and members of the U.S. Securities and Exchange Commission (“SEC”), concerning the importance of establishing regulations that ensure shareholders real influence over the appointment of directors of US companies.

212 See Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007 (2008), at 121-123. “Norges Bank has, during the course fo 2007, initiated or continued contact with about 95 companies in the Fund’s portfolio, as part of its active ownership effort. . . . In those cases where Norges Bank identifies a company that it wishes to influence, it prepares a plan of action that defines, inter alia, the purpose of the dialogue.” Id., at 123.

216 Id. at 1. The remainder is provided by Egypt and by a power plant in Gaza. Id.

217 Id. at 2. The reduction, in the amount of 0.5 megawatts, was confirmed by the U.N. Office for the Coordination of Humanitarian Affairs, focused on the Gazan side of the dispute, pursuant to its report of February 8, 2008, and considered by the Ethics Committee. Id.

218 The Report painted a grim picture for the Palestinian population of Gaza and assumed “that there has been a plan to reduce the electricity supply to Gaza as a response to rocket attacks on Israel, and that a reduction by 0.5 MW has been implemented. The report is also understood to suggest that there is an escalation plan which involves further, weekly reductions by 0.5 MW per week.” Id. at 2.

219 “Assuming, however, that there did exist a plan to escalate the rate of reductions in electricity supply, as suggested in the OCHA report, it seems clear that this plan has not been implemented.” Id., at 5.

220 “The question of legality of IEC’s reduction in electricity supply to Gaza has been the subject of a petition for temporary injunction brought before the Supreme Court of Israel. The petition is brought on by a group of private individuals and NGOs in Israel. In the Supreme Court ruling, dated January 27, 2008, it was found that the reduction in electricity supply is not unlawful.” Id., at 2.

221 Id. Instead, finding the question technically complex, the Council “assumes that, in practice, it is probably difficult to distribute the power according to humanitarian needs.” Id., at 3.

222 “The ambassador described the security situation for the civilian population of Israel which is subjected to repeated rocket attacks from Gaza. She also explained that employees of IEC have been targeted by gunfire when they have conducted maintenance work on the power lines which supply Gaza from Israel, and that Israeli power plants which produce electricity for Gaza are also targeted by rockets launched from Gaza.” Id., at 3.

223 “The Palestinian energy officials confirm that there are no ongoing reductions in the electricity supply to Gaza. The 0.5% reduction by IEC, which OCHA and other sources has referred to earlier, had in fact ceased.” Id.

224 Id., at 4. It also disregarded the connection between the State of Israel as majority shareholder of IEC. Id.

225 Id., at 4.

226 Id.

227 Id., at 5. The intellectual journey was a bit curious:

The Council finds it difficult to have a clear opinion on the likelihood of such possible, future reductions in the supply of electricity to Gaza. Companies’ past actions can, however, give indications to future behaviour. Considering the situation in general and the repeated rocket attacks against Israel, it cannot be ruled out that future situations could arise where IEC again is instructed to reduce the electricity supply to Gaza. Assuming, however, that there did exist a plan to escalate the rate of reductions in electricity supply, as suggested in the OCHA report, it seems clear that this plan has not been implemented. It also seems clear that there have been no repetition of the power cuts.

As of January, 2008, the Fund had 8 equity and 2 bond investments in Israeli companies. By January, 20 09, this number had increased to 41 equity and 2 bond investments. Investments in non-Israeli companies which may have some form of operations in Israel are not included in this figure. The extent this of is difficult to estimate.

Id. It reviewed the ouncil’s investigations to date, focusing on the issue of investment in the Israeli Electric Company. Id. It investigated the role of the Israel Electric CPOmpany in the conflict in Gaza at the end of 2008. “The Council is unaware of any recent informat ion indicating that IEC has reduced the supply of electricity to Gaza as a means of sanction. Therefore, there seem to be no grounds at present to conduct a renewed assessment of the Fund’s investment in bonds issued by IEC.” Id. It stressed the role fo the Council in assessing company rather than state behavior, but also indicated that state behavior can directly impact assessment of corporate behavior. “It is the role of the Council to assess companies’ behaviour, not possible breaches of norms by states or other parties. In states where international humanitarian law or other norms are violated, there will be an increased risk of companies’ involvement in such violations.” Id. Most importantly, however, the Council indicated a future object of investigation—one tied to the political issues of Israeli occupation of lands assumed by the world community to eventually become a Palestinian state:

The Council has, on the basis of the Guidelines’ exclusion criteria pertaining to human rights violations and violations of individual’s rights in war and conflict, assessed several Israeli companies and companies operating in Israel. A part of this analysis is to assess whether companies in the Fund have activities which can be considered supportive of violations of international humanitarian law. One area of such interest is the construction of various forms of infrastructure in occupied territories.

Id. It is here that the conflation of private and public conduct—that is of the use of the Norwegian SWF as a vehicle for the execution of political goals becomes clearer.For a timeline of the events in the Gaza Strip during 2008, see Gaza Conflict: Key events of 2008, Sky News, Dec. 27, 2009, available (accessed April 13, 2009).

229 See discussion, supra, at text and notes 35-38.

230 This is considered in Larry Catá Backer, Case Note: Rights And Accountability In Development (Raid) V Das Air (21 July 2008) Global Witness V Afrimex (28 August 2008): Small Steps Toward An Autonomous Transnational Legal System For The Regulation Of Multinational Corporations, MELBOURNE JOURNAL OF INTERNATIONAL LAW (forthcoming 2009).

231 See, Council on Ethics Government Pension Fund—Global, Annual Report 2007 (Council on Ethics’ Assessment of Companies With Operations in Burma, id., 82-85).

233 “The majority of these companies belong to the energy, mining, oil and gas, hydroelectric power, telecommunications, banking, pharmaceutical and hotel sectors. The companies are listed on, among others, the South Korean, Thai, Singaporean and French stock markets.” Id., at 82.

234 Id., at 82.

235 Id., at 83.

236 Thus, “the Council has obtained information from the concerned companies as well as from different organisations. The Council’s secretariat has also temporarily employed a staff member who, in February this year, was in the border areas between Burma and Thailand to gather information on the human rights situation related to construction projects. Also, during a visit to India in February, the secretariat sought to clarify the status of the cooperation between India and Burma for the construction of a gas pipeline.” Id., at 83

237 “in October of this year the secretariat will meet with Burmese citizens in exile, various organisations and the Norwegian embassy in Bangkok to gather additional information.” Id., at 83.

238 Id., at 84.

239 Id., at 84.

240 Id.

241 Id., referencing Guidelines ¶ 2 subpar. 3.

242 “Such projects have previously been known to lead to forced displacement of people and to forced labour.” Id., at 85.

243 “It must be assumed that conditions related to mining in Burma can be severe, both in terms of environmental aspects, working conditions and effects on livelihood for the population in proximity of the mines. Nor can it be ruled out that forced labour is used, either in the mining operations themselves or when clearing areas for new mines.” Id., at 85.

244 Id., at 85.

245 See discussion, infra, at text and notes, --; see also International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices; “Santiago Principles, (October 2008), (hereafter the “Santiago Principles”), at GAPP 3 Principle (“Since SWFs are often created for macroeconomic purposes, their operations should support and be consistent with a sound overall macroeconomic policy framework.” Id., at GAPP 3 Principles, Explanation and Commentary).

247 Archer, John and Moskwa, Wojciech, Norway oil fund big buyer of stocks, eyes new deals, Reuters (Oslo), May 29, 2008. The article indicates that the fund is shifting to a 60 percent allocation in stocks from 40 percent, and that just over 50 percent of the equity portfolio is in Europe. The article indicates that Norway’s SWF is buying equities and selling bonds to make this transition. According to the article, Mr. Slyngstad [the NBIM manager] indicated that the fund’s subprime exposure “is minimal, less than .4 percent of the fund... We regard volatile markets as ... an opportunity”. Also, according to Mr. Slyngstad, the fund has been approached to take part in “quite a few deals” and he has formed a special division (Capital Strategy Division) to invest larger, more concentrated equity stakes in companies: "That would represent a new departure for the fund -- concentrated large ownership, quite likely for a longer period -- using our size and our longer investment horizon.. If for some reason we would participate in a recapitalization of a large bank with a large stake, basically this group would be doing it... A fund of our size is quite likely to have been shown quite a few deals ... I wouldn't say that we have not participated, but I won't confirm that we have either".

250 Chanjaroen, Chanyaporn, Helical Bar in Talks Over Potential Takeover, Observer Reports, Bloomberg.com, August 3, 2008. Chanyaporn Chanjaroen of Bloomberg reported on August 3, 2008 that according to the Observer, Helical Bar Plc was “in talks with Norway’s sovereign wealth fund which may lead to a takeover of the U.K. property developer”, according to an unidentified person close to the company. According to the news report, the discussions were preliminary and could result in a large cash injection for the company. “The Norwegian fund considered appointing Helical Bar Chief Executive Officer Michael Slade to run its European property investments.” However, a spokesman for helical Bar had declined to comment. Id.

253 Berglund, Nina, Oil fund takes ‘minor’ hit from US mortgage crisis, Aftenposten English Web Desk/Reuters, August 26, 2008. The article mentioned Norway’s SWF exposure in the US mortgage companies Fannie Mae and Freddie Mac. According to the article, Yngve Slyngstad indicated that the fund's total Fannie Mae and Freddie Mac exposure amounts to about NOK 88 billion (USD 16.36 billion): "Eighty-eight billion (crowns) is relatively little in relation to other central banks, but it is that big because we consider this the second most secure investment in the United States," Slyngstad said. The oil fund's holdings in Fannie Mae and Freddie Mac bonds have fallen from a value of NOK 129 billion at the end of 200, Slyngstad said while releasing the fund's second-quarter results. The fund, formally called The Government Pension Fund -- Global, grew by 2.4 percent in the second quarter from the first, reaching NOK 1.992 trillion (USD 370.8 billion) though it had a negative return on investment. The fund's return was a negative 1.9 percent in the second quarter, hit by turmoil in financial markets.”

254 Moskwa, Wojciech and Knudsen, Camilla, Norway’s wealth fund says was prepared for Lehman, Reuters (Oslo), September 15, 2008. They reported that Norway’s SWF was prepared for the bankruptcy filing by U.S. bank Lehman Brothers, in which the fund held more than $840 million worth of stocks and bonds at the end of 2007. According to the article, the Government Pension Fund – Global owned .27 percent equity stake in Lehman Brothers at the end of 2007 worth $88.78 million, and it held Lehman Brothers Holdings Inc. fixed income securities worth 4.38 billion browns. The fund also held approximately 1.55 billion crowns of debt from other Lehman vehicles. Id.

255 Interview by Gregory Roth with Yngve Slyngstad, Chief Executive, Norway Government Pension Fund – Global, Norway (Published September 26, 2008). The report indicated that indicated that over the first six months of 2008, the fund reduced its holdings of Fannie Mae and Freddie Mac debt by almost a third. “Does this reflect a loss of confidence in the debt of these two lending giants, which are now backed explicitly by the United States government?” asked Mr. Roth “It doesn’t reflect a lack of confidence in these institutions or the U.S. system. I think you rather have to say that there are other investment opportunities in the United States that may look equally attractive or more attractive for the moment” said Mr. Slyngstad. But there was no further elaboration on this issue.

256 Mr. Yngve Slyngstad, CEO of Norges Bank Investment Management (NBIM), made the following remarks when commenting on the performance of the fund in a November 25, 2008 press release published by Norges Bank:

“the third quarter of 2008 was an unusually demanding quarter for the management of the Government Pension Fund – Global. Uncertainty in financial markets increased dramatically, and this affected the return on the fund. The return on the fund in the third quarter was -7.7 per cent in international currency. The return on the fund was 1.8 percentage points lower than that on the benchmark portfolio defined by the Ministry of Finance.”

257 Ibison, David, Norway set to dip into $332bn oil fund, Financial Times.com, Global Economy, December 15, 2008. By December 14, 2008, David Ibison reported in the Financial Times.com that Norway would tap its sovereign wealth fund in January 2009 to finance a new fiscal spending package in order to offset the rapid slowdown in Norway’s economic growth next year. The article mentions the following statements by Jens Stoltenberg, Norway’s prime minister: “Jens Stoltenberg, Norway's leftwing prime minister, said in an interview the government will unveil spending measures in January on top of its previously announced expansionary budget for 2009.” We have held back and been restrictive in our use of oil revenues in strong times but we can start to spend more now that we see a downturn coming," he said. " Id.

260 Ziemba, Rachel, Raiding The Sovereign Rainy Day Fund, RGE Analysts EconoMonitor, December 16, 2008. The report also noted that “Norway could have to draw on its principal not just on the income on its investments.” Id.

261 Norges Bank, Norges Bank Foreign Exchange Purchases in January 2009, Press Release, December 31, 2008. Norges Bank’s purchases of foreign exchange are equal to the difference between the allocations and the SDFI’s estimated foreign exchange revenues. Adjustments are made for any revisions of estimates for the previous month. As a result, the daily purchases may vary from one month to the next. The daily foreign exchange purchases are determined for a period of one month at a time and are published on the last business day of the preceding month.” Id.

262 Norges Bank, NBIM seeks court decision to delay Constellation shareholder vote on acquisition by MidAmerican, Press Release, December 17, 2008, at: (accessed Feb. 1, 2009). According to Anne Kvam, the Head of NBIM Corporate Governance ““We are one of the biggest shareholders and take these necessary steps in order to safeguard our financial interests. In our opinion, the MidAmerican agreement undervalues Constellation, and we expect the board to work for a solution that offers the highest value opportunity.” Id.

263 Id. “The escalation of the financial crisis and collapse of commodity prices likely only accelerated the trend in which sovereign funds or the governments that sponsor them are increasing their spending at home. Many other funds have also announced support of their financial sector or fiscal stimulus to support growth.” Id. 264 China View, PM: Norway to spend more oil money in 2009 to deal with financial crisis, Business, Special Report: Global Financial Crisis, January 7, 2009 (Stockholm). A January 8, 2009 article published by China View indicates that Norway will spend more money from the state pension fund to support the economy in the global financial crisis. Norwegian Prime Minister Jens Stoltenberg is quoted saying “In 2009 we will use much more of the oil income than justified by the expected returns from the pension fund” in a speech at the Annual Conference of the Confederation of Norwegian Enterprise. Also, Mr. Stoltenberg indicated that the government could use up to 4 percent of the $300 billion dollar pension fund and that “the cash would be used for boosting employment and securing Norway’s generous welfare state”. This decision will be presented on January 26, 2009. According to the article, in the meantime, the government has pledged a fiscal stimulus package this month to keep Norway’s sharply slowing economy from recession”. Id.

265 Norway “unveiled a NKr20bn ($3bn, €2.25bn) fiscal stimulus package as it starts to use its massive oil wealth to boost growth and employment in its struggling economy. The Nordic country of just 4.7m people has amassed $370bn in oil revenues – the world’s second largest sovereign wealth fund, after Abu Dhabi’s – and is now starting to use it to soften the effects of an expected recession.” David Ibsen, Norway Dips Into Oil Fund for NKr20Bn Stimulus, Financial Times, Jan. 26, 2009 (“The new spending package comes on top of a previously announced expansionary budget that was equivalent to 0.7 per cent of gross domestic product and takes total government spending on the crisis to 2.3 per cent of GDP – one of the most aggressive spending plans in Europe.” Id.).

268 “It is further suggested that corporate governance criteria should not be decisive for purposes of the inclusion or exclusions of markets in or from the investment universe or the benchmark portfolio. The Bank is of the view that the best corporate governance effects are achieved through presence and active involvement, and that such effects will in large part concern company specific matters.” Id., at 110.”

275 “India has a stake in the on-going debate by virtue of its increasing importance in global capital flows. The critical issue relates to standards of governance and transparency that are adopted by such funds and the extent of comfort that investee countries have in this regard,” Reddy said.” Sanjiv Shankaran, Centre Puts SWFs Under the Scanner, LiveMint.com (India), March 10, 2008.

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Copyright; Citation and Attribution:

All essays are (c) Larry Catá Backer except where otherwise noted. All rights reserved. The essays may be cited and quoted with appropriate reference. Suggested reference as follows: Larry Catá Backer, [Essay Title], Law at the End of the Day, ([Essay Posting Date]) available at [http address].

The author holds a faculty appointment at Pennsylvania State University. Notice is hereby given that irrespective of that appointment, this blog serves as a purely personal enterprise created to serve as an independent site focusing on issues of general concern to the public. The views and opinions expressed here are those of its author. This site is neither affiliated with nor does it in any way state, reflect, or represent the views of Pennsylvania State University or any of its entities, units or affiliates.

Ravitch and Backer's Law and Religion: Cases, Materials, and Readings

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Globalization Law and Policy Series from Ashgate Publishing

Globalization: Law and Policy will include an integrated bodyof scholarship that critically addresses key issues and theoretical debates in comparative and transnational law. Volumes in the series will focus on the consequential effects of globalization, including emerging frameworks and processes for the internationalization, legal harmonization, juridification and democratization of law among increasingly connected political, economic, religious, cultural, ethnic and other functionally differentiated governance communities. This series is intended as a resource for scholars, students, policy makers and civil society actors, and will include a balance of theoretical and policy studies in single-authored volumes and collections of original essays.

An interview with the Series EditorQueries and book proposals may be directed to:Larry Catá BackerW. Richard and Mary Eshelman Faculty Scholarand Professor of Law, Professor of International AffairsPennsylvania State University239 Lewis Katz BuildingUniversity Park, PA 16802email: lcb911@gmail.com

About Me

I hope you enjoy these essays. Each treats aspects of the relationship between law, broadly understood, and human organization. My essays are about government and governance, based on the following assumptions: Humans organize themselves in all sorts of ways. We bind ourselves to organization by all sorts of instruments. Law has been deployed to elaborate differences between economic organizations (principally corporations, partnerships and other entities), political organization (the state, supra-national, international, and non-governmental organizations), religious, ethnic and family organization. I am not convinced that these separations, now sometimes blindly embraced, are particularly useful. This skepticism serves as the foundation of the essays here. My thanks to Arianna Backer for research assistance.